How does high-frequency trading work on decentralized exchanges?

Following the decentralized finance (DeFi) boom of 2020, decentralized exchanges (DEXs) solidified their place in the ecosystems of both cryptocurrency and finance. Since DEXs are not as heavily regulated as centralized exchanges, users can list any token they want.

With DEXs, high-frequency traders can make trades on coins before they hit major exchanges. Plus, decentralized exchanges are noncustodial, which implies that creators cannot pull an exit fraud — in theory.

As such, high-frequency trading firms that used to broker unique trading transactions with cryptocurrency exchange operators have turned to decentralized exchanges to conduct business.

What is high-frequency trading in crypto?

High-frequency trading (HFT) is a trading method that uses complex algorithms to analyze large amounts of data and make quick trades. As such, HFT can analyze multiple markets and execute a large volume of orders in a matter of seconds. In the realm of trading, fast execution is often the key to making a profit.

HFT eliminates small bid-ask spreads by making large volumes of trades rapidly. It also allows market participants to take advantage of price changes before they are fully reflected in the order book. As a result, HFT can generate profits even in volatile or illiquid markets.

HFT first emerged in traditional financial markets but has since made its way into the cryptocurrency space owing to infrastructural improvements in crypto exchanges. In the world of cryptocurrency, HFT can be used to trade on DEXs. It is already being used by several high-frequency trading houses such as Jump Trading, DRW, DV Trading and Hehmeyer, the Financial Times reported.

Decentralized exchanges are becoming increasingly popular. They offer many advantages over traditional centralized exchanges (CEXs), such as improved security and privacy. As such, the emergence of HFT strategies in crypto is a natural development.

HFTs’ popularity has also resulted in some crypto trading-focused hedge funds employing algorithmic trading to produce large returns, prompting critics to condemn HFTs for giving larger organizations an edge in crypto trading.

In any case, HFT appears to be here to stay in the world of cryptocurrency trading. With the right infrastructure in place, HFT can be used to generate profits by taking advantage of favorable market conditions in a volatile market.